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Democracy is the theory that the common people know what they want, and they deserve to get it good and hard.
—H.L. Mencken
I’m not a fan of government.
I have a jaundiced view of government, not because a book told me to, and not because some blowhard on the radio told me to. No, I have a jaundiced view of government because I worked for a Long Island municipality for twenty-one years. And of all the “public servants” I worked with over those twenty-one long years, I don’t think I can name ten who really gave a crap about the taxpayers.
The vast majority of my co-workers viewed their employment as a dodge. Their objective was to do as little work as possible for as much taxpayer tribute as possible. And to this end—thanks to copious PTO, arcane work rules, money-grubbing politicians, and wantonly derelict management—they were stunningly successful. In fact, they were so stunningly successful, they used to refer to their jobs as “high-class welfare.”
Now here’s the real rub. The vast majority of my co-workers were good people. I know that sounds absurd, and for the longest time I couldn’t reconcile the gnawing contradiction between their values and their actions. How do decent, capable people off the clock become so lazy, incompetent, and shiftless on the clock? Then it hit me. Good people are no match for the inherent flaws of government.
The Inherent Flaws of Government
This isn’t a dissertation, so I’m not going to slam you with a lot of detail. But here in a nutshell are the inherent flaws of government. These are the reasons why government is so inept and why so many of its employees behave so poorly.
1. Government has a conscripted clientele. Apple can’t generate revenue by forcing people to buy its products. Likewise with GM, Walmart, and Netflix. Government on the other hand isn’t so constrained. It can legally force the people living or operating within its jurisdiction to fund its operation (hello taxes). And it doesn’t matter if the people like the quality of the services being provided, or even use the services.
Since government can’t lose “customers” as easily as private sector businesses can, it’s more apt to provide shoddy service. Why? Because providing a quality product or service is super hard work. Just ask Apple, GM, Walmart, and Netflix. And human nature being what it is, people won’t work super hard unless they absolutely have to.
Having a conscripted clientele removes the need for government employees to work hard.
2. Government spends other people’s money. Before I left for college, I was notoriously lackadaisical when it came to turning off lights. In college, however, I never exited a room without turning off the lights. Why? Why was I so profligate with electricity at home and not at college? Well, at home, dad was paying the electric bill. In college, I was. In other words, when I wasted electricity at home, my dad was punished. When I wasted electricity at college, I was punished.
Pain is a great motivator. Remove the pain of bad financial decisions and people will be more inclined to make bad financial decisions.
Government employees spend taxpayer money (i.e., other people’s money), and they never get punished for being poor stewards of that money. “Never,” of course, opens me up to charges of hyperbole. But I’m going to risk that because I’ve never in my fifty-seven years seen a headline reading anything close to this: “Humongous State Highway Project Finished Two-Years Late and Four Times Over Budget: DOT Head and All Assholes Involved in the Project Fired.”
If anyone has a news report of government employees being severely punished for grossly wasting taxpayer money, please send it my way.
3. Government can legally sell favors. Just recently, Amazon announced that one wing of its second headquarters will be located in Long Island City, New York. To woo Amazon to New York, New York State and New York City offered Amazon nearly $3 billion worth of subsidies and tax breaks. Now here’s a question for you. Is that $3 billion worth of taxpayer-funded goodies fair to the other businesses in New York? I mean, c’mon, whatever happened to equal protection of the law? Why is Amazon more special than your friendly, neighborhood bodega? I’m sure a bodega owner or two wouldn’t mind reduced property taxes and some construction grants to upgrade their facilities.
When it comes to taxes and subsidies anyway, the government can legally treat some Americans like second-class citizens. We are told by the fans of big government that this is a good thing. Government is wiser and nobler than private citizens and it should be able to encourage activities that better promote the commonweal.
Hogwash.
Because of inherent flaws one and two (and six and seven coming up), the government bestows favors based on campaign contributions and votes, not on reason, virtue, and an unflagging desire for a “more perfect union.”
Allowing the government to sell favors is the perfect way to favor the wealthy and organized (e.g., big defense, big finance, big medicine, big education, big law, etc.). This lamentable fact wouldn’t be so bad I suppose if the wealthy and organized were completely selfless. But that sadly is not the case.
4. Citizens can legally buy favors. Build it and they will come. Create a market for favors and favor seekers will beat a path to your door. And to the government’s credit, it doesn’t discriminate when it comes to favors. It’s an equal opportunity whore. As long as you’re wealthy and organized and can give politicians what they covet most—money or votes or both—then you’re entitled to government favors too.
5. Monetization of workplace rewards kills morale. This is a fancy way of saying that “politics” or “pay to play” or “honest graft” creates a lot of pissed off worker bees. In my municipality, promotions and bonuses were heavily monetized by management. If you wanted to get ahead, you did so not by doing your job extremely well, but by contributing a lot of money to the Republican Party. Those who neither had the money nor the stomach to become Republican lackeys naturally came to resent the monetization of promotions and bonuses. And many of the resentful rebelled against this injustice with the crudest of all weapons at their disposal: sloth, sloppiness, and sabotage.
6. People aren’t angels. Government must be manned with the same imperfect humans that make up our nation’s workforce. This means the average government employee has average morals. He or she obeys the law and follows the work rules. But don’t expect him or her to resist unethical or immoral behavior if that behavior is legal and complies with department policy or norms. At my municipality, for instance, most of my co-workers were bums. On the typical workday, they gave the taxpayers about two to three hours of half-assed effort. Such behavior was atrocious, of course, and a slap in the face to the taxpayers. But such behavior was legal (there’s no law against slackerism), and such behavior complied with department policies and norms (management seemingly had no interest in getting the most out of its labor resources, and there was no fiduciary-like law compelling them to put the taxpayers’ interests first).
And I’m not even going to address the damage to good government caused by the small number of government employees who have below average morals. Here’s the bottom line. Absent a major upgrade to our existing arsenal of checks and balances, there’s no way government can rise above inherent flaws one through five. In order to do so, it would need a workforce comprised entirely of people with Jesus-like integrity. And that ain’t happening anytime soon.
7. Voting is a poor check against government’s inherent flaws. One of the most pervasive arguments against investing in actively-managed mutual funds is that it’s very hard to pick tomorrow’s rockstar fund managers. Fund managers who are kicking-ass this year can very well be next year’s duds. The market is that fickle and cruel. Now a question. If the average retail investor can’t reliably pick the “right” fund managers, what are the odds that this very same guy or gal can step into the voting booth and—with really no objective data to guide his or her decision—reliably pick the “right” politician? And by “right,” I don’t mean a politician who votes the “right” way on important bills. I mean a politician who won’t be ground down or corrupted by the inherent flaws of government and who actually does something to mitigate them. I say those odds are very low. And our national debt of $21 trillion—a glaring example of chronic voter impotence, if there ever was one—says I’m right.
More Government Bad
When I hear about a CEO making over $100 million in a single year or about the cost of a prescription drug skyrocketing overnight from $5 a pill to $1,000 a pill, I sympathize with the supporters of big government. They see the profit motive of the private sector, and the greed and avarice it seemingly engenders, as a major drag on affordability. Remove the profit motive by moving a private sector function to the government and that function should theoretically become more affordable. Or will it?
The notion that government can do things cheaper than the private sector is misguided for two reasons. First, the excesses in the private sector that make the news and piss everyone off are largely the result of the government bestowing favors. If the government didn’t thwart competition and stifle innovation, it would be a lot harder for corporate boards to lavish CEOs with $100 million windfalls and for drug companies to charge $1,000 for a pill that costs less than $5 to produce. So when you see these outrages, you’re more than likely not seeing the worst of free market capitalism. You’re more than likely seeing the worst of crony capitalism. To honestly compare the efficiency of government to the efficiency of the private sector, then, you have to compare government, not to crony capitalist firms, but to non-crony capitalist firms.
In a fair contest measuring efficiency, non-crony capitalist firms would wipe the floor with the government. And this brings me to the second reason why faith in government as a low-cost provider of goods and services is misguided. It has to do with anatomy.
In the private sector, the profit motive acts as an invisible hand. It forces non-crony businessowners to serve their interests by serving the customer’s interests. Improved product or service + lower price for said product or service = more customers and more profits. In government, however, the inherent flaws we discussed above act as invisible feet. They force politicians and public administrators to serve their interests by serving the interests of the politically strong, not the interests of the taxpayers in general. Higher taxes for the politically weak + strategic favors for the politically strong = a greater chance of being re-elected and maintaining power.
If one can argue that profits in the private sector are a drag on affordability, one can equally argue that the inherent flaws of government in the public sector are a drag on affordability as well. And here’s the crucial distinction, the drag of government’s inherent flaws is way more burdensome than the drag of profits. To illustrate this sad reality, I’ve conjured up an imaginary company, the Acme Sex Toy Company, and looked at the hypothetical costs of producing 100,000 units of its latest sex toy, El Senor Dinero Bigote (SDB for short).
The Acme Sex Toy Company is a pretty lean operation. In order to produce 100,000 SDBs and bring in a million dollars worth of revenue, it spends $550,000 on labor, $200,000 on materials, and $150,000 on overhead. Its profit of $100,000 amounts to ten percent of SDB revenue.
[visualizer id=”10599″]
Since the Acme Sex Toy Company produced 100,000 SDBs for a million dollars in revenue, the per unit cost of an SDB, including the cost of profits, is ten dollars. If we took away the profits, and expected the owners of the Acme Sex Toy Company to help cure retirement blahs for nothing, an SDB would cost nine dollars.
Let’s now see how much it would cost the government to produce 100,000 SDBs.
[visualizer id=”10601″]
Even with one less cost of production—profits—the government isn’t nearly as lean as the Acme Sex Toy Company. Its labor costs are triple and come to $1,650,000. And the reason for this is because its union employees must have “livable wages.” And each of its union employees must also have annual PTO of twenty-five vacation days, five personal days, eleven holidays, and thirteen sick days. And let’s not forget healthcare and pensions. How could union employees have any dignity without gold-plated health insurance and generous pensions guaranteed by the state constitution? Finally, and this is a biggie, we can’t forget all the phony-baloney jobs that need to be created for all the misfit relatives and friends of the politicians who oversee the production of SDBs. Government has to hire fifty percent more workers than the Acme Sex Toy Company to produce the same number of SDBs. Politicians have a lot of misfit relatives and friends.
Material costs are likewise triple what they are for the Acme Sex Toy Company. The government can’t outsource mustache bristles for the SBD to China. In fact, it can’t outsource any of the SBD components to China. It has to get all of its materials from American companies. And any American company it uses must pay its workers, as per the law, “livable wages” as well. Also, any American company it uses must have—per the law again—the right number of women and minorities in the right number of positions. Companies that can fulfill the government’s exacting contract standards aren’t common and their wares don’t come cheap.
Overhead costs? Yeah, they’re triple too. The warehouse where the government’s sex toys are stored is owned by a very influential politician’s brother, and oddly enough, the contract that saddles the government with very high storage rates was awarded on a no-bid basis. Imagine that.
In order to produce 100,000 SBDs, the government spent $2,700,000. That comes to a per unit cost of $27. If the government wanted to sell SBDs to the consumers at the Acme Sex Toy Company’s no-profit per unit cost of $9, it would need to borrow $1,800,000 or increase taxes by $1,800,000 to cover the shortfall. Either way though, the government would only appear to be a low-cost producer of SBDs. In actuality, of course, society would be poorer if SBD production were shifted to the government.
So this is why I’m a limited-government nutter. The larger the government footprint becomes, the more areas of life become subject to the inherent flaws of government. Not good. The government, because of its inherent flaws, is a very clumsy tool. Whenever you use it, incompetency, inefficiency, and stagnation follow in its wake. You end up paying 3x or 4x for a good or service of a given quality rather than x. And the only reason most people fail to appreciate this is because the government’s inherent flaws aren’t as easily documented as profits. Right after you read this awesome post, for instance, you could bring up Apple’s latest 10-K SEC filing with a simple Google search and see how much before-tax profit Apple made. If you brought up your local city or county’s latest budget, however, I doubt you’d find a section detailing what politician’s brother won what no-bid contract.
What, Me Worry?
Up until very recently, I worried a great deal about taxation. The march of government—because of immigration and a socialist-loving school system—is unstoppable. Taxation, therefore, will only grow more ominous by the year. (This is especially true when you consider that deficit spending is nothing but deferred taxation.) But then I had a change of heart. Maybe the Democratic Republic of the United States won’t be so bad.
One reason for this change of heart is my fellow bloggers. There are several bloggers who I deeply respect—hello Vicki, Matt, Angela, and Penny—and their knowledge of government is just as intimate as mine, and they aren’t nearly as repulsed by government as I am. In fact, they welcome greater government involvement in our lives. They want “free” healthcare, “free” daycare, and “free” college. So it’s entirely possible my firsthand experience with government was an outlier—that is, it’s entirely possible my fear of government is overwrought and my notion of the government having inherent flaws is a bunch of alt-FI flapdoodle.
Since people smarter than I welcome bigger government, I have reason to be cautiously optimistic. But here’s the real reason I’ve had a change of heart about our growing Leviathan: I’m not paying for it. That’s right. It suddenly dawned on me that I legally don’t pay taxes. So what do I care if our government adds healthcare, daycare, and college to our basket of unalienable rights? Sure, if my inherent flaw theory turns out to be correct, and more government means more incompetency, inefficiency, and stagnation, taxes will eventually be gushing out of many a wazoo. But only from the wazoos attached to people who pay taxes. My wazoo will be perfectly safe.
I’m not particularly proud of my Alfred E Neuman epiphany. To be indifferent to the harm of excessive taxes just because I don’t pay them is pretty scummy. But that’s the subject of another post. For now, though, I just want to show you how you too can legally pay zero taxes. And as an added twist, I want to show you how to do this with aplomb. You could legally avoid paying taxes of course by being unemployed and living in a van down by the river. But how much fun is that? No, if you’re going to be a world-class moocher, you might as well do it in style. Here’s how.
The Glories of Being Poor, Rich, and Financially Independent in a Low-Cost State
If you legally don’t want to pay taxes, and have plenty of money to live a fabulous life, you need to do three things. First, you need to have a household income that is just shy of two times the federal poverty rate. Second, you need to be financially independent—that is, you need to have at least 25 times your annual living expenses sitting in the bank or various investment accounts. And finally, third, you need to live in a low-cost state, particularly as it relates to taxes. Hit this trifecta and you won’t be obligated to pay taxes. Here’s the concrete evidence.
Household Income Just Shy of Two Times the Federal Poverty Rate
Check. My household income for 2018 will be $30,000. Since the federal poverty rate for a family of two is $16,460 in 2018, that puts my household income at 1.82 times the federal poverty rate.
Financially Independent
Check. Mrs. Groovy and I—thanks to luck, discipline, and a ravenous thirst for FIRE-spiked Kool-Aid—achieved financial independence by early 2014. We didn’t say goodbye to our crummy jobs until October of 2016, though, because we’re wussies and we wanted to enter retirement with a fat-FIRE portfolio rather than a normal-FIRE portfolio.
Live in a Low-Cost State
Check. North Carolina still has enough “don’t tread on me” citizens to keep taxes low by national standards.
Pay No Taxes
Because of the magic of tax-loss harvesting, my AGI for 2018 will be $27,000. Let’s now calculate the income taxes I’ll owe on that amount.
I file a joint tax return with Mrs. Groovy. The standard federal deduction for a married couple in 2018 is $24,000. Subtract $24,000 from $27,000 and you get a taxable income of $3,000. That amount of income puts Mrs. Groovy and me in the 10 percent tax bracket. Three thousand times 10 percent comes to $300. My federal income tax bill for 2018 will be $300.
The standard deduction for a married couple in North Carolina in 2018 is $17,500. Subtract $17,500 from $27,000 and you get a taxable income of $9,500. North Carolina has a flat-rate income tax of 5.499 percent. Times $9,500 by 5.499 percent and you get $522. My state income tax bill for 2018 will be $522.
My combined state and federal income tax bill for 2018 will be $822. Sweet. But we still have two more taxes to consider: property taxes and sales taxes.
My property tax bill for 2018 is less than half of what it normally is. We sold our Charlotte house in May and have been living with my parents ever since. The property tax bill for five months of homeownership, a 2004 Camry, and 3.4 acres of undeveloped land comes to $1,001.17.
Thus far in 2018, I’ve paid $739.22 in sales taxes. But we still have another month to go and it’s impossible to record every sales tax you pay (I’m not going to hold up the McDonald’s drive-thru because the harried person at the first window failed to give me a receipt). So let’s pad my sales tax bill by a comfortable margin and say my sales tax bill for 2018 will be an even $1,000.
Okay, my total tax bill for all levels of government will come to $2,823.17. Divide that amount by $30,000, and you get an effective tax rate of 9.4 percent for 2018.
Obamacare to the Rescue
“But wait just a cotton-picking minute,” I hear you screaming. “I thought you said you don’t legally pay any taxes. That $2,823.17 you’ll be paying in various taxes ain’t nothing.”
Right you are, groovy freedomist. But you’re forgetting about my Obamacare subsidy. Because my household income is only eighty-two percent above the federal poverty level, the federal government considers me rather pathetic and worthy of a lot of help. My Obamacare subsidy for 2018 comes to $23,640 (94% of my annual healthcare premium). That makes me a gigantic teat-sucking layabout. I’m consuming far more tax dollars than I’m contributing. The paltry $2,823.17 I contribute to the national bill for missiles, welfare, and roads is completely wiped out—many times over—by the $23,640 Obamacare gift the taxpayers are lovingly throwing my way.
Subtract $23,640 from $2,823.17 and you get -20,816.83. This in turn will give me an effective tax rate of -69 percent for 2018. So, yes, my claim that I legally don’t pay taxes is perfectly valid.
To paraphrase the immortal Chico Esquela, “big government is being berry, berry good to me.”
Live a Fabulous Life
I legally don’t pay taxes. That’s fine and dandy. But am I beating the system with aplomb? Am I being a world-class moocher with style?
In a word, “yes.” And I came to this conclusion because 1) I own 100 percent of my time, and 2) I have enough discretionary income to do what truly makes me happy. Here’s a nice bulleted list to show you what I mean.
- Mrs. Groovy and I spend roughly $36K a year.
- Dividends from our portfolio and a small pension from New York State easily cover our annual living expenses. Because of this we’re retired and own 100 percent of our time.
- Of the $36K in annual spending, a little more than $10K is discretionary. That’s the money we use to enjoy life—to travel, visit family and friends, tinker on home improvement projects, take long walks, and write inane blog posts.
- Because we have a fat-FIRE portfolio, we could comfortably double or triple our discretionary spending. We haven’t pushed the hedonistic envelope thus far in retirement because Groovy Ranch has been a rather time-consuming endeavor. But watch out in 2019, 2020, and 2021. Australia, Ecuador, Thailand, and Vietnam—here we come.
There you have it, groovy freedomist. It’s hard not to be zip-a-dee-freakin’-doo-dah happy when you don’t have to work and you have $20K-$30K of fun money to spend every year.
Bottom line: income poor-asset rich financial independence is the greatest tax loophole ever devised by man. Achieve it and you’ll have plenty of time and money to do what you truly love, and, as an added bonus, the government will refuse to tax you. How freakin’ groovy is that!
Groovy Ranch Update
Okay, enough of my twisted views on government, taxation, and the greatest tax loophole ever devised by man. What’s up with Groovy Ranch?
Last week we got our CO and wrote our final check to Terry. Groovy Ranch is officially open for business. We don’t have any furniture, and we’re sleeping on air mattresses, but the build process is finally over and we’re now proud residents of Louisburg, North Carolina (population 3,502). In my next post, I plan to do a deep dive on our adventures in building from scratch—the good, the bad, and the ugly. In the meantime, though, I want to share our numbers. Here is what Groovy Ranch cost us.
| Item | Contract Price | Actual Price | Over/Under Amount |
|---|---|---|---|
| 3.4 Acres of Cleared Farmland | $34,000 | $34,000 | $0.00 |
| House – 1,528 Square Foot Farmhouse | $228,750 | $230,897 | $2,147 |
| Garage – 24 x 28 | $24,750 | $27,889 | $3,139 |
| Totals | $287,500 | $292,786 | $5,286 |
At first glance, the cost of our house does seem a little high. The final price per square foot came to $151.11 ($230,897 ÷ 1,528). But Raleigh and Wake Forest are super popular right now on the real estate front and they’re sucking up a lot of construction material and construction talent. So everything’s just more expensive. The days of getting a quality home at $100-$110 per square foot are long gone. On the bright side, though, even at $140-$150 per square foot, North Carolina is still a bargain. My architect cousin was in town from New York this past Thanksgiving, and he said new construction prices on Long Island are over $400 per square foot. Plop my home in a nice town on Long Island and it would have cost over $600K to build. Ouch!
Final Thoughts
Okay, groovy freedomist. That’s all I got. What say you? Do you think my fears about growing government are reasonable? Or do you think I’m being a soy boy? And what do you think about using the principles of FIRE to skirt the cost of civilization and become a world-class moocher? Is that a moral or ethical strategy to pursue? Let me know what you think when you get a chance. Peace.
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